Iraqi Kurdistan-focused Genel Energy downgraded its reserves for the Taq Taq oil field
Iraqi Kurdistan-focused Genel Energy yesterday downgraded its reserves for the Taq Taq oil field in Kurdistan for the second time in just over one year and withdrew its 2017 production guidance of 24,000-31,000 b/d. The field produced 116,000 b/d in 2015 but output is now just 19,000 b/d, down from 36,000 b/d at the end of 2016. Water breakthrough rates are high. Remaining recoverable proven and probable reserves are now assessed at 59.1mn bl. The last estimate at the end of 2015 put reserves at 172mn bl, since when 24mn bl has been produced. And Genel — which reports full-year results tomorrow — said there remains considerable uncertainty over the field's reserves.
The most recent downgrade for Taq Taq follows similar reserves revisions by other upstream operators in Kurdistan over the past few years. Operator Norwegian independent DNO revised net reserves at its Tawke field to 242mn bl in March last year from 264mn bl previously. And Taq Taq and Tawke are not just two fields among many. In late 2015, they accounted for some 40pc of production controlled by the Kurdistan Regional Government (KRG). Hungarian oil firm Mol and London-listed independent Gulf Keystone Petroleum (GKP) relinquished their interests in the Akri-Bijeel production-sharing contract (PSC) in January last year, following a reassessment of the block's recoverable resources. And GKP and London-listed independent Afren downgraded their Kurdistan reserves in 2014. Afren's problems were legion but its Kurdistan downgrade was a material factor in the London-listed independent's collapse.
The emerging trend has rung alarm bells over the accuracy of initial estimates of Iraqi Kurdistan's oil reserves. It may also sound a warning over the estimated gas reserves that are seen as an important future revenue stream.
After ExxonMobil pulled out of three of six exploration blocks in Kurdistan — East Arbat, Qara Hanjeer and Betwata — the KRG natural resources ministry (MNR) will been keen not to deter potential further investment, given its plan to offer 20 recently redrawn blocks this year.
In a bid to improve its investment framework, the KRG brought in financial services companies Deloitte and E&Y to audit its oil and gas data at the end of last year. This was an attempt to boost transparency and address public concerns over government corruption, following allegations by opposition political parties. The audits cover production, local oil swaps and sales, pipeline and truck exports, refinery operations, bonuses received and other oil and gas sector expenditure and revenues. The problem is that data publication has dried up.
The ongoing audit process has led to a delay in publishing the MNR's monthly reports detailing the KRG's oil exports, consumption, production and revenue. The latest report to be published was for November, before the auditors were brought in.
KRG officials say the MNR does not want to publish unaudited numbers, but the delay has raised concerns about the auditors' findings as reserves downgrades are announced, production guidance revisited, and companies relinquish exploration blocks. Some analysts suspect the KRG's oil ministry may ask the auditors to put a positive spin on revisions and downgrades by arguing that the current situation does not affect future potential. And this reasoning does have some currency — reserves assessments could increase with further investment, as could production.
But therein lies a stubborn problem — the KRG's strained budget. Despite largely successful efforts to regularise payments to foreign oil companies for their output last year, there is still a massive overhang of debt accrued for past sales. The KRG owed Norwegian independent DNO $1.14bn for past deliveries of crude from the Tawke field at the end of 2016, up from $1.06bn at the end of 2015. Without payment, companies' ability and willingness to invest in programmes to appraise and develop their fields is constrained. Kurdistan is geologically complex, needing advanced techniques for exploiting its hydrocarbon potential. Downgrading reserve estimates is more realistic option in the current fiscal environment.
The KRG is in perpetual financial crisis from the cost of funding its Peshmerga security forces and housing refugees displaced by the war with Islamist group Isis. Erbil struggles to fund social needs and also pay enough to satisfy the oil companies. Yet their output provides as much as 95pc of government income.
The resumption of regular payments to operating companies last year and a recent flurry of arrears payments have increased optimism amongst foreign oil firms. The MNR has promised to continue providing GKP with $15mn/month and continues to talk about money it owes the firm from May-December last year.
But analysts question the sustainability of these payments. Shaikan crude is being trucked to Turkey again as it is currently excluded from the export stream injected into the Kirkuk-Ceyhan pipeline, for reasons of quality. Officials in northern Iraq, including director-general of Iraq's state-owned North Oil (NOC) Farid al-Jadir, are trying to reduce the sulphur content of the export blend. While this will not affect the monthly payment routine, the KRG will cover any additional transport costs arising.
This does not have any immediate financial burden on the KRG. The pipeline exports to Ceyhan without the Shaikan crude are now sold at higher prices by the KRG, and Shaikan crude exports by truck are achieving similar netback prices to before, GKP says. But an official at the firm said this is only commercially viable at the relatively low current production rates of 38,000 b/d. Plans to increase the field's output have long been in place but are gathering dust.
In addition, Erbil relies on Turkey and Baghdad for funding. Receiving a portion of Baghdad's financial aid from the IMF under a programme designed to help restructure Iraq's economy is contingent on relations between the two sides.
At surface level, the relationship seems stable. Iraqi prime minister Haider al-Abadi said last week in Washington he will continue to devolve more responsibility to provincial governments and did not dismiss outright the possibility of an independent Kurdish state.
But underlying relations are rocky, worsened by recent decisions in Baghdad that further fuelled long-standing divisions between the Patriotic Union of Kurdistan (PUK), which controls the key oil fields in north Iraq's Kirkuk province, and the Kurdistan Democratic Party (KDP) that runs the KRG.
The federal government decided in February to supply the 100,000 b/d Erbil refinery with 40,000 b/d of crude following shortages of refined products in Kirkuk. PUK officials saw this as a snub that ignored their demands for a new refinery in Kirkuk. The PUK stormed NOC's headquarters on 5 March before withdrawing, and held three days of protests outside NOC facilities in Kirkuk.
Further complications include Iraq's initial agreement with Iran to study the construction of a new pipeline to export crude from the northern fields in Kirkuk eastward, through Iranian territory. Iran supports the PUK and a deal could bolster the party's independent financial position as well as its relations with Baghdad.
Tensions between the two Kurdish parties may increase following the downgrades of Kurdistan's reserves, increasing the KRG's desire to control the oil-rich fields in Kirkuk. Baghdad has long looked to restore full control over those fields.
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